Investing in real estate

MarshallLoeb

NEW YORK (CBS.MW) -- Let's say that you're middle-aged, and your children have recently finished school and struck out on their own.

You're suddenly relieved of a great financial load. Immediate temptation may be to spend the extra money on the many things you've been waiting so many years for. But purge that urge to splurge.

Now may be a time to put money away or diversify into investments outside the rocky stock market. Consider this: Real estate has been the source of more great fortunes than just about any other investment.

The key to success is to acquire property that offers value beyond tax benefits, because of location or other attributes. Invest in real estate for income and capital appreciation, but don't insist that every nickel you spend bring a tax deduction.

If you own rental property, you will be able to deduct your mortgage interest payments, property taxes and expenses only up to the amount of your rental income. But if you have net losses above this amount, you can carry them forward to next year.

If you're buying with a view toward renting out, then particularly good investments are three-bedroom, two-bath houses. They are large enough for small families, which tend to be tenants. Demand for those structures is strong in many communities. That means they usually can pay you enough in rents to cover your mortgage and maintenance costs -- and give you a nice profit.

If you are a first-time investor, avoid buying entire parcels of heavily mortgaged commercial properties such as stores or office buildings. Managing them requires special expertise: For example, knowing how to handle business leases. Stick with residential properties; they are easier to handle.

Novice investors also should stick to their own communities. The market will be familiar, and travel time will be less than if you buy a far-off building. By investing in or near your own backyard, you will be in a strong position to anticipate what will happen to real estate prices.

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